Foreclosure – FAQs
1. WHAT IS FORECLOSURE?
When someone purchases a house and borrows money from a lender to purchase the property, a promissory note and mortgage deed are signed. The promissory note is simply the contractual obligation to repay the lender. The mortgage deed essentially conveys the real property to the lender as security for repayment of the promissory note. When a borrower defaults on payments under the promissory note, the lender through the foreclosure process, extinguishes the borrower’s rights in the real property, thereby taking the property in satisfaction of the debt.
2. HOW IS FORECLOSURE ACCOMPLISHED?
The lender commences a civil action usually in the State Superior Court where the lender seeks to obtain a judgment that will establish the amount of the debt owed, and, if the debt is not paid, a foreclosure of the property which secures the debt.
3. WHAT IS STRICT FORECLOSURE?
A strict foreclosure does not involve a judicial sale of the property. Instead, each of the individuals or entities that holds an interest in the property being foreclosed are assigned “Law Days”. Law Days are assigned in inverse order of priority. This means that the last creditor has the first opportunity to redeem the property. Law Days give each owner of an interest in the property an opportunity on a specific date to come forward and pay the entire debt due the lender. If the holder of an interest in the property does not pay the entire debt on its Law Day, it forfeits its interest in the property, and the next prior creditor has the opportunity to redeem the property by paying the lender in full on the next business day. This process continues until the lender is paid in full or, absent payment, the lender takes title to the property.
4. HOW MANY OTHER STATES USE STRICT FORECLOSURE?
Strict foreclosure is used by only three states. Connecticut is one of them.
5. ONCE FORECLOSURE PROCEEDINGS HAVE BEEN COMMENCED, IS THERE ANY WAY TO AVOID FORECLOSURE?
In some cases, a business arrangement may be made with the lender. One must keep in mind that most lenders are not in the business of buying and selling real estate, nor do they wish to be. As a result, many lenders would prefer to enter into payment plan arrangements with their delinquent borrowers to avoid foreclosure. Other options, such as short sales, are also available.
6. WHAT IS A SHORT SALE?
A short sale is a private sale of real property, which is agreed to by the lender and the borrower to avoid foreclosure. Under the short sale scenario, a lender agrees to take less than a full payoff on its mortgage debt. The borrower benefits as a result of foreclosure being avoided. The lender benefits in that it is not required to take on the real property through foreclosure and the costs of resale associated with that property.
7. HOW LONG DOES A FORECLOSURE TAKE FROM START TO FINISH?
On average, three to six months.
8. CONNECTICUT USES BOTH STRICT FORECLOSURE AND FORECLOSURE BY SALE. HOW OFTEN IS EACH USED?
Generally speaking, a court will only order a foreclosure by sale if there is equity in the property (i.e., liens against the property when totaled do not meet or exceed the fair market value of the property) or if there are federal tax liens filed against the property being foreclosed. If there is no equity in the property, the court will order strict foreclosure.
10. HOW IS A PROPERTY SOLD THROUGH A FORECLOSURE BY SALE?
The Superior Court appoints an individual, usually a local attorney, as the foreclosure committee. This individual advertises the sale and conducts an auction at the property on a date set by the Court. The bid obtained from the highest bidder at the auction is submitted to the court for approval. If the court approves the highest bid obtained at the auction, the sale is completed within 30 days of court approval of the sale.
11. WHAT IS A DEED IN LIEU OF FORECLOSURE?
A deed in lieu of foreclosure is the result of the lender and the borrower agreeing that the borrower will give the lender a deed to the property, which secures the loan. The deed in lieu of foreclosure would obviate the need for a foreclosure. Usually, the agreement includes the understanding that the debt is paid in full.